Debt restructuring: The process of refinancing a loan

Credit refinancing is another term for debt restructuring and can thus refer to one or more loans. An additional borrowing is possible in principle.

The prerequisite for a refinancing is that the previous loan can be repaid early. This is the case with consumer loans in principle, but often against the payment of a prepayment penalty, the case. In the case of real estate loans, on the other hand, premature repayment and thus refinancing can be contractually excluded during the first ten years of the fixed interest period.

A refinancing must be associated with benefits

Some banks automatically propose to their clients, in conjunction with a new loan, the refinancing of existing liabilities so that they only have to pay back one loan. The reduction in the number of creditors, however, is not a real advantage, because the expense for the already predominantly by direct debit payment of credit installments is low. Also, the score value within the private credit information is not appreciably affected by several loans in progress, of concern in this context is only the almost simultaneous application for multiple loans.

The main advantage of a loan refinancing is the reduction of the cost of a loan through a favorable loan. In calculating the potential savings, consumers take into account, in addition to the interest on the old and the new loan, any prepayment interest that may have to be paid for the early redemption. In addition to the low lending rates, a flexible repayment is possible for the new loan. Ideally, the borrower may not only repay the new funding early, but may also take a break from the plan once a year, or at least every two years. Such facilitates the proper loan repayment with surprising additional expenditure or exceptionally missing revenue.

In some cases, refinancing without meaningful savings makes sense. This is especially true when the new loan is associated with a significantly lower duration than the previous loan, so that the monthly installments fall. Before the replacement of the previous credit agreement by a new loan, a request for a possible contract change with the previous lender is possible.

The process of refinancing a loan

In the case of a loan refinancing, the new lender needs the certainty that the customer actually repays existing liabilities and does not take up another loan in contrast to his statements. For this reason, he does not transfer the loan amount to the applicant, but directly offsets the existing credit accounts. An exception, of course, the compensation of the disposition credit, since the money intended for this purpose inevitably enters the customer’s current account. This also applies to a top-up amount.

Many banks are demanding that the borrower settle all existing liabilities as part of a loan refinancing. As a rule, special loans such as real estate financing are excluded, as well as low-interest vehicle loans and interest-free dealer financing. If consumers want to refinance only a portion of the existing loans, they look for a bank in their credit comparison, which allows a partial rescheduling.

Some credit institutions offer a lower interest rate for a loan refinancing than for a non-earmarked consumer loan. However, the discount does not exclude that another financial institution awards the loans without earmarking on better terms.

The term of a loan refinancing may not be too short. Otherwise, there is a risk that the borrower, especially when settling the loan installment, will once again use its discretionary loan repayments, which will again result in high interest costs.

A refinancing with a weak credit rating

The rejection of an application for a refinancing of existing loans, the motive of which was a desired interest savings, is easily bearable. Finally, the current loan agreements remain in the event of a failed debt restructuring.

The likelihood of lending despite a weak credit rating increases if the applicant applies for the new loan to refinance existing loans with a second person. This must have a regular income and a private credit information without negative entry. In principle, anyone can act as a co-credit borrower, even if individual credit institutions presuppose a joint residence of both credit customers.

As an alternative to refinancing existing loans through a bank, organized personal loans are conceivable. This applies in particular to the case where the borrower is forced to rely on a longer term and the associated low monthly installments and the current bank has not approved of a contract amendment. Private credit applicants expressly point out this fact in their request, since many members active on the respective platforms as lenders are also guided by the urgency of private lending. They do not see this as a given when they want a mere interest savings, while they understand the need for rate reduction.